In Wharton Social Impact Initiative’s “Research Spotlight” series, we highlight recent research by Wharton faculty, doctoral students, and staff whose research focuses on the intersection of business and impact.
This month, we spoke with Maoz (Michael) Brown, head of research at Wharton Social Impact, and Lauren Kaufmann, WSII doctoral fellow and Wharton PhD candidate in legal studies and business ethics, about their forthcoming research on how impact investors measure impact. After many intensive interviews with impact investors, they share key findings about the current state of impact measurement and how they think impact assessment might change in the future.
Your study explores impact measurement in impact investing. What exactly is impact measurement?
Michael Brown and Lauren Kaufmann: All investors measure the financial performance of their investments. But impact investors also aim to measure the social and environmental performance of their investments. The idea of impact measurement is to gauge the benefits that investments generate for customers, society, and the planet.
Impact measurement is nowhere near as straightforward as measuring financial performance. This is a point of frustration that we heard from the impact investors we interviewed. Impact measurement is generally far more complex than calculating an investment’s financial return. We’re talking about outcomes that are hard to measure, data that are difficult to collect, and lots of questions around how much, if any, credit investors can claim for positive impact outcomes.
Why were you interested in researching this topic?
Brown and Kaufmann: Impact investors know that they are expected to measure impact, but they very rarely have the time, training, and funding to do impact evaluation in a way that provides the same kind of clarity that financial reports do. We wanted to understand how impact investors navigate this tension between the expectations they face and their technical capacity to meet those expectations.
In a nutshell, what are your most important findings?
Brown and Kaufmann: We found that a lot of impact assessment gets done in a fairly informal, or intuitive, way before an investment is actually made. Does the company “feel” like an impact investment? Does it have socially motivated leadership? Is it in a sector that seems inherently impactful, like education or healthcare?
Once they have made an investment, impact investors tend to rely on conventional financial performance metrics combined with descriptive accounts of impact-oriented operational data to judge impact. So, for example, if a company they have invested in shows increasing revenues and can document gains in, say, the number of rural beneficiaries reached or the number of women served, impact investors report gains in impact.
We found that many impact investors are very thoughtful about how they assess impact potential when they consider deals. We were impressed with how resourceful and systematic many of them are in thinking about impact and building an investment strategy around social and environmental themes, as they’re managing this tricky balancing act between taking impact seriously and not overburdening themselves, or their investees, with impossible measurement standards.
What surprised you most?
Brown and Kaufmann: In this research, we mostly interviewed impact fund managers, who act as intermediaries between asset owners (like wealthy individuals or pension funds) and the companies receiving impact capital to generate socially beneficial products and services. When impact fund managers produce impact reports, it’s generally to show those asset owners what their investments accomplished.
We were surprised to hear that asset owners rarely pressure impact fund managers to improve their impact measurement standards. According to our respondents, asset owners are generally quite content with impact reports they get from their fund managers, even when those reports consist of anecdotes and relatively simple tallies of impact metrics, such as how many patients were served or how many units of affordable housing were built. Our respondents told us that asset owners seem satisfied with current impact reporting standards, despite their being far less rigorous than commercial performance reporting.
The reason for this pattern may be that asset owners understand how difficult and costly it can be to measure impact, especially alongside the work of building and growing businesses.
What is the most important lesson or takeaway for practitioners?
Brown and Kaufmann: If you’re an investor who’s looking into starting an impact investing practice, then take comfort in the fact that no one has perfected impact measurement yet. There are lots of frameworks and case studies and guides out there for impact measurement, and they’re great for thinking seriously about articulating goals and developing impact strategies, but there is no definitive and foolproof approach. There are real opportunities to create and innovate.
How do you think impact measurement practices will change in the near future?
Brown and Kaufmann: We think that impact investors will improve their impact measurement practices as the industry grows and matures. There is increasing recognition of the critical difference between measuring commercial performance and measuring impact. Commercial performance ultimately shows through in the financial reports. When it comes to impact, impact investors often just can’t get the kind of data they need to make clear and convincing statements on how their specific investments have improved the world.
We think that investors can and, we hope, will solve this challenge by relying on professional researchers. For investors who want to claim impact with confidence, it’s going to depend on the production and availability of high-quality, rigorously designed research from scientists and professional evaluators. The best examples of impact assessment in the future will focus on screening potential investments for their alignment with those research-backed findings, rather than tracking the impact of those investments after the fact.
Posted: September 28, 2021